RBC: THREE REASONS THE BULL WILL CONTINUE
RBC entered the year with a very bullish posture (see their 2010 outlook here) and the recent sell-off hasn’t altered their position. They see the market continuing its bull run and ending 2010 with a 16.5% gain at S&P 1300. Their thesis is built around three primary factors:
1) The market is still cheap. The average analyst consensus is calling for $77.50 this year. That pegs the S&P at a PE ratio of just 14.4 – well below its historical average of 16.3. They think the entirety of 2010 will be made up of analyst revisions, upgrades and price target increases.
2) Globalization. RBC says the global economy is stronger than it has ever been because it is so intertwined. The rise of emerging markets has bolstered the entire world at a time when developed markets are weak. Although the recovery has been uneven in both markets we will all ultimately benefit when the entire global economy returns to full strength.
3) Stocks are still hated. RBC argues that stocks are still a hated asset class. They argue that, in addition to $3 trillion in money market funds, there is a disproportionate amount of cash in bonds. If interest rates rise and/or the economy continues to recover this money will have to flow into riskier assets. Stocks are the most obvious beneficiary.
Source: RBC
When interest rates rise, money moves out of bonds? Makes perfect sense.
These guys must have a 3 month horizon because there are too many negative events
hitting the market in the middle of the year for this to be a long term outlook. What are the odds of Marc Faber, Jim Rogers, George Soros, Noutiel Roubini, et. al. being wrong in predicting major difficulties in H2? We know that $400 B in CRE resets a year start as of H2. The banks have to start the process of actually foreclosing homes that they have been avoiding for over a year now. PCE is dropping because there are so many unemployed. Stay with simple math: 10% unemployed receiving 50% of their normal earnings ( unemployment paycheck). So that would be 5% times the 70% of GDP that they make up , and you have an automatic 3.5% loss in GDP as a starting point. That does not even begin to account for the other 7% unemployed, but not accounted for in the government’s current system. So any little event that goes wrong in the next few months is going to start next big correction down. Anyone caught in the market at that time will be stranded due to lack of breadth and unable to sell their stock. Stops are not going to protect in a major correction, you know that they will not be acted on soon enough to protect a position.
These guys are smoking some serious dope.
1) Let’s look at the growth rates that need to take place in Q3 and Q4 for this to happen. Profit Margins are at the high end of their historical range. Cost cutting to improve profits is nearing an end. Revenue Growth must take over…20+% growth rates over Q2,Q3 and Q4, on 10% unemployment and another massive payment shock from the next wave of mortgage resets?….uh huh.
2) We are starting to see the double edge sword of globalization. During the good times, more people participate, but during the bad times, are gov’ts really going to pick up the slack for other countries screw ups? While we did see Abu Dhabi come to Dubai’s rescue (I hear this is not happening 100% now) I don’t think this will happen on a mass scale if there isn’t an economic recovery that many are expecting. There will be a default of a major gov’t, there are just too many holes in the dam at this point to plug them all up…. the force of this downturn will no doubt bring out protectionism as everyone tries to take care of in house problems.
3) Not according to the investors_intelligence survey… while it has shown a large increase in bearish observations, I don’t think this due to equities being completely hated, but maybe because it is so obvious that we are not headed in the right direction. The retail investor is sick of getting suckered punch (twice in the last 10 yrs). Maybe this more fidgety sentiment is a more secular change towards a need for income rather than capital appreciation. We do have the baby boomers arriving at retirement…. most with large holes in their nest eggs.
http://www.market-harmonics.com/free-charts/sentiment/investors_intelligence.htm
why even bother, RBC ECRI GS and the rest, we all know that there MKT and stock calls would only harm you, unfortunately, some how, they always get some poor turks stuck with the hot potatoes, I have this terrible feeling that things are about to get a lot more complicated then what we think, even if they stage another BS bounce, I hope all readers are moore traders then inwestors thank you TPC always great reeding